Analyst Greg Drahuschak explains that despite recent market turmoil, the equity market is at a level that offers significant opportunities.
Recent market turmoil about the coronavirus (COVID-19) shoved the S&P 500 into bear market territory, as the S&P 500 was down more than 20% from its most recent high (3393.52).
Hundreds of Wall Street reports have attempted to assess the ultimate impact of the virus on the economy, but they each recognize that it is impossible to determine with any degree of certainty what the eventual outcome will be. Similar situations in the past eventually were resolved by the equity market recovering all of its losses. This, however, does not take away from the angst investors have now.
The current market sell-off is following a familiar script. As the chart on the left shows, no S&P sector has been exempted from losses. The initial pullback from the February 19 high was slow, but it accelerated when the S&P 500 broke through its 50-day moving average and quickly sank to its 200-day moving average. For six trading sessions, the S&P 500 traded around its 200-day average in hope that this typical level of market support would stem the selling. As news on the virus grew worse, the S&P gapped lower multiple times. The more than 20% drop from the high was the fastest on record. The market expects that earnings for 2020 are likely to fall sharply from the current $171.81 estimate.
With the S&P 500 falling as low as 2508.93 on March 12, we think the market already has discounted the potential for a minor recession. Technical factors offer some guidelines about where an eventual low will be, but completely relying on them is a mistake. However, the recent selling has created extremely stretched internal market conditions that often lead to a rebound. For example, in multiple trading sessions recently, more than 90% of all stocks on the New York Stock Exchange were down, which is a highly unusual circumstance.
We believe that the market is setting up for an eventual recovery that could erase most and possibly the entire drop from the high.
Precisely timing the recovery is difficult, but the equity market is at a level that offers significant opportunities, as valuations have fallen sharply and yields available in quality common stocks have risen to compelling levels. We advocate gradually staging idle cash into stocks at this time, as the market gradually begins to look toward the eventual recovery.
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